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Jan 20, 2010

Performance summary

Lower interest and benign depreciation charges further help company post a strong profit during the quarter as opposed to a small loss during same quarter last year

Bottomline for the nine month period grows more than fourfold on the back of a mere 14% growth in topline

(Rs m)

3QFY09

3QFY10

Change

9mFY09

9mFY10

Change

Net sales

8,687

10,895

25.4%

28,273

32,080

13.5%

Expenditure

8,103

10,058

24.1%

26,442

29,687

12.3%

Operating profit (EBDITA)

584

837

43.3%

1,831

2,393

30.7%

EBDITA margin (%)

6.7%

7.7%

6.5%

7.5%

Other income

3

9

227.8%

19

40

110.3%

Interest (net)

194

180

-7.1%

411

505

22.7%

Depreciation

392

408

4.0%

1,199

1,223

1.9%

Profit before tax

0.4

258

62106.5%

240

706

194.5%

Extraordinary income/(expense)

-

(4)

-

(10)

Tax

10

19

87.0%

75

34

-54.9%

Profit after tax/(loss)

(10)

235

165

662

301.8%

Net profit margin (%)

-0.1%

2.2%

0.6%

2.1%

No. of shares (m)

237.5

237.5

237.5

237.5

Diluted earnings per share (Rs)*

3.4

Price to earnings ratio (x)*

22.9

* on trailing twelve months earnings

What has driven performance in 3QFY10?

Overall volumes were higher by 26% YoY and grew at nearly the same rate as the topline. This indicates that there was no favorable shift that was witnessed in product mix. Motorcycles, a high value product for the company grew by 18% YoY in the domestic markets. While the growth is impressive, it has come in way below industry growth rate of 40%, indicating loss of market share. Growth in scooters however came in much higher at 42% YoY, beating the industry growth rate of 17% and buoyed by success of new launches. The surprise package though was the mopeds segment, which managed a growth of 49% YoY and contributed the most to overall growth. With competitors like Bajaj Auto and Hero Honda getting more aggressive in the motorcycles space, we expect the company to continue to face volume pressure in this segment whereas growth in other segments is likely to come in favorable in the near to medium term. While exports have begun to show signs of recovery, they nonetheless fell by 20% during the quarter on a YoY basis.

sales break up

Domestic

3QFY09

3QFY10

% change

9mFY09

9mFY10

% change

Scooter/scooterette

50,788

72,260

42.3%

180,931

220,899

22.1%

Motorcycles

94,844

112,307

18.4%

353,784

360,374

1.9%

Mopeds

96,078

143,311

49.2%

317,740

417,982

31.5%

Three-wheelers

956

2,891

202.4%

2,947

8,095

174.7%

Total

242,666

330,769

36.3%

855,402

1,007,350

17.8%

Exports

Scooter/scooterette

3,582

2,436

-32.0%

7,944

7,507

-5.5%

Motorcycles

49,706

38,820

-21.9%

132,702

98,215

-26.0%

Mopeds

1,566

2,440

55.8%

5,751

4,410

-23.3%

Three-wheelers

-

334

NA

-

634

NA

Total

54,854

44,030

-19.7%

146,397

110,766

-24.3%

Grand total

297,520

374,799

26.0%

1,001,799

1,118,116

11.6%

The company’s high operating leverage has meant that even a 100 basis point improvement in operating margins has led to a 43% growth in operating profits. While raw material costs have come down significantly as a percentage of sales on account of lower commodity prices, higher other expenditure has taken some sheen off the same. Nevertheless, the company has still managed to eke out margin improvement.

Apart from higher operating margins, benign depreciation charges and lower interest costs has helped the company to propel its growth further and has resulted in a strong growth in net profits. Net profit for the nine month period has also witnessed similar buoyancy, coming in higher by 302% YoY.

What to expect?

At the current price of Rs 78, the stock trades at a multiple of 8x its expected FY12 cash flow per share. The company has done well of late not only in terms of improving its topline but also in containing costs. However, any further improvement on the margin front looks difficult to come by and the growth will have to be driven by growth in volumes. While the same has received an impetus on account of the company’s entry in the three-wheeler business, we expect TVS to continue to remain a distant third in the two-wheeler space. The company’s valuations at current levels warrant some degree of caution.

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